Ten years ago this week, the global financial crisis started with a small rumble in France. Local bank BNP Paribas announced it was freezing the assets of three hedge funds with heavy exposures to the US sub-prime mortgage market. A little more than a year later, after the run on Northern Rockand the bailout of Bear Stearns in the US, the full earthquake arrived in the form of the collapse of Lehman Brothers, one of Wall Street’s biggest banks.
We soon discovered the full horrors within the financial system. Banks had taken on risks they did not understand and called the process “innovation”. Credit rating agencies had fallen asleep. Weak or incompetent regulators, encouraged by politicians, had been idle. In the UK, RBS would be mostly nationalised and the ailing HBOS was shoved into the arms of Lloyds TSB with a state bailout to follow.
A decade after the start of the drama is a good moment to ask whether the financial system, and the world, is truly safer. There is good news – but also worrying signs of trouble ahead.
The encouraging part is that the world of banking has been transformed from the under-capitalised, over-leveraged and inadequately supervised system of 2007. In June this year, Mark Carney, governor of the Bank of England, was able to report that losses that would have wiped out the entire capital base of the UK banking system in 2006 could now be fully absorbed by the top-up capital buffers alone. But, in the new spirit of caution, he still demanded more to cope with rising credit risks.
Regulators are now obliged to use their judgment, rather than rely on rigid models, in forming their views on individual banks’ capital needs. They have tried to instil a culture of personal accountability at the top of financial firms. There is greater international cooperation since the formation of the Financial Stability Board in 2009. Transparency has improved, too. More financial trades have to be cleared through central counterparties, which in theory means the toxic creations of yesteryear – collateralised debt obligations, and so on – could not balloon in size unnoticed.
This new system has yet to be tested under fire, of course. Would regulators really trust their own “resolution” regimes if another big bank was in peril, or would they again resort to state funds? It’s impossible to know until the crisis arrives, but the positions of taxpayers look massively improved from 2007-09. That is the good news.
The bad news is that, when one takes a step back, some of the deeper causes of the crisis look as entrenched as ever. In their first response to a debt-fuelled crisis, regulators pursued what Lord King, Carney’s predecessor, called the “paradox of policy” – they slashed interest rates to encourage spending and to prevent recession turning to depression. But the medicine was supposed to be only for short-term emergency use.
Almost a decade later, UK interest rates are 0.25%, and the US has reached only 1%-1.25%, but the debt has not been sweated off. In the UK the household savings rate has collapsed. The amount being set aside as savings has now slipped to just 1.7% of disposable income, the lowest level on record. That may explain why Carney’s colleagues are shouting warnings about a potential “spiral of complacency” in lending. Easy credit has become the norm, but growth is too weak to risk a quick return to “normal” monetary conditions. Those ingredients are ripe for another credit bubble.
Or perhaps the next crisis might arrive from elsewhere – such as China, now having to cope with its own enormous levels of internal debt. A China-inspired global downturn would be a fresh phenomenon for the world, but the west would be ill-equipped to pick up the slack. The central bankers’ rate-cutting cupboard is bare. A decade on from the start of the crisis, fixing the banks looks the easier part of the job. How to replace debt with a better engine of growth remains the unsolved challenge. It is hard to be optimistic.
Tweaking the listing rules – yes, even for Aramco – is unwise
Xavier Rolet, chief executive of the London Stock Exchange, thinks we should not be surprised if the listing rules in London “from time to time are refreshed by the regulator to take into account the reality we live in”.
Put like that – and with scrupulous avoidance of any reference to Saudi Aramco – the process can be made to sound benign. A tweak here, an update there: isn’t that what the grown-ups at the Financial Conduct Authority should be doing to maintain London’s place at the top of the global financial pecking order?
The problem, of course, is that the FCA’s proposal to create a new category of “premium” listing for state-controlled companies is not a minor revision. Such companies would be able to ignore two protections for shareholders that have been regarded as fundamental to the highest standards of governance.
First, Aramco (because, let’s face it: the FCA has only raised the subject because the Saudis intend to sell a small slice of their oil titan) would not have to seek outside shareholders’ approval for deals between the company and the state. Second, Aramco would not be obliged to give outside shareholders a vote on who should represent their interests as independent directors.
The FCA’s thin justification is that companies controlled by a state are somehow different from those controlled by private individuals. Get real, the Institute of Directors said, more or less, in its excellent submission to the regulator last week.
“The need for … checks and balances on controlling shareholder power are as great, if not greater, in cases where the controlling shareholder is a nation,” it said. A state has overwhelming power: as the IoD said, there is a fair argument that listing rules should be strengthened, not softened, for state-backed firms.
Will the FCA back down? It should. Opposition from fund managers, and now the IoD, is strong. They can see what should be obvious: that lowering governance standards will damage London’s reputation and be bad for business in the long run.
So long, Irene, and thanks for all the broken promises
“Where’s Irene?” was a familiar refrain during 2010, when Kraft’s chief executive Irene Rosenfeld refused to turn up to a parliamentary committee investigation into the US company’s takeover of Cadbury.
Seven years on, it’s more a case of good riddance, Irene, after her departure was announced from Mondelēz – the business spun out of Kraft two years later to house Cadbury and brands such as Toblerone and Milka.
Rosenfeld – who was paid nearly $22m the year after the takeover – made few friends in the UK. MPs on the business committee concluded the company had been close to contempt of the Commons by her refusal to attend. The Takeover Panel censored Kraft after it broke the promise it made during the five-month takeover battle to keep open Cadbury’s Somerdale factory in Somerset. It did so only a week after its bid succeeded. In the UK at least, all her business achievements will be forever overshadowed by these events.